Chase H&Q morning report
Applied Materials [AMAT]
Rating: BUY
August 10, 2000
Near-term momentum waning; long term outlook very positive
* The company reported Q300 EPS of $0.70 on revenues of $2.73 billion, bettering the street consensus of $0.68 and our revenue and earnings estimates of $2.65 million and $0.65, respectively. Quarterly bookings grew to $3.28 billion, creating a 1.2:1 book-to-bill.
* For Q400 and F01 we are increasing EPS estimates to $0.75 and $3.65 from $0.73 and $3.48, respectively, while maintaining our previous top line figures.
* Overall the Applied call provided some solid evidence that the current semiconductor cycles has not come to an end. Management expects capital expenditure increases at several leading semiconductor companies next year, and supported our view that the DRAM spending cycle has yet to kick in. 12 to 18 month outlook remains rosy.
* Quarterly results essentially fell in line with expectations. Q4F00 guidance of only 6.7% sequential bookings growth continues to show a declining growth rate. While we are tweaking estimates, the change is relatively small in magnitude.
* Although near-term data points for the capital equipment industry to likely remain sluggish, we continue to believe that fundamentals for the industry on a bookings momentum basis could improve substantially around Q4C00. Therefore, in our opinion, the current share prices provide an excellent opportunity for meaningful share appreciation within the next 6 months. . . .
FQ3 results. . . Revenue grew a solid 25% sequentially, topping our estimate of $2.65 billion. Net income grew an even higher 29% quarter over quarter, as the company benefitted from increased gross margins and reductions in operating expenses.
Bookings continue to growing hitting $3.28 billion in Q3F00 The company generated bookings of $3.28 billion in Q3F00, falling in the range of expectations of $3.2 to 3.3 billion. This created a book-to-bill ratio of 1.2:1 which continued to moderate from 1.3:10 in Q2F00, as we had expected. We also believe that this is a leading indicator of the continuous trend of declining of the industry-average book-to-bill. Backlog continued to grow to heights, increasing to $3.69 billion from $3.18 billion. The primary driver behind the quarterly growth was vast capital spending in all regions, especially Japan. As a result record orders were achieved across most product groups and were strong across all regions. MPU and logic applications led bookings with 60%, foundries were responsible for 25%, and DRAM consisted of only 15%.
Among the fastest growing segments were process diagnostic and control equipment, benefiting from smaller geometries and newer technologies. Dielectric CVD continued to sustain market share leadership for HDPCVD in copper and aluminum applications. CMP experienced record bookings with increased penetration in Japan, as well as increased penetration in copper and tungsten applications. KTP also experienced record results as Applied continued market share leadership in this area for the third consecutive year. During the quarter the company also shipped its first med/high energy implant tool to a US customer. Copper appears to be progressing well as the rate of adoption is proceeding as expected. The company claims market leadership in barrier/seed, electroplating, and dielectric etch.
Regional diversification in bookings. Geographically, bookings continue to be well diversified with significant growth in Japan, which saw bookings more than double from the previous quarter. Bookings in North America led the way with 30%, with particular strength in logic. Japan, with its rapidly growing capital expenditure made up 24%. Taiwan was responsible for 15%, which is down from last quarter as Taiwan foundries invested heavily in prior quarters. As a result the digestion of such previously ordered tools may keep orders in this region lower for the next one to two quarters. After which time the company expects Taiwan to return to the higher historical levels as excess demand still exists from numerous fabless customers, which made up over 55% of the foundry orders. Europe and SE Asia accounted for 15% and 9%, respectfully[sic]. Finally Korea, which rounded out the group with 7%, we believe will increase significantly in the coming quarters as investments in DRAM begin. Contrasting foundry and Taiwan as a percentage of bookings led us to believe that there have been substantial foundry related activities outside of Taiwan.
Capacity build out continues to drive demand. Looking forward to Q4F00 and beyond to FY01, the company expects to see continued growth in bookings (in excess of $3.5 billion for Q4), as strong demand is seen across multiple product lines, driven primarily by the need for additional 200 mm capacity and continued investments in copper and 300-mm. Management conveyed information that 13 new "greenfield" fabs and 16 major expansions were slated for C00 and 16 new fabs and 15 expansions in C01. 7 of the new 2001 greenfield fabs are slated to be 300mm.
In addition order sizes appear to be greatly increasing as compared to a quarter ago. In Q3 the company had 30 customers with orders over $10 million as compared to 36 such customers in Q2. However, the number of customers in Q3 over the $50 million mark were 18 vs 16 last quarter. For the largest of orders, over $100 million, Applied had 8 customers as compared to 7 in Q2. Thus, Applied appears to be well positioned with very strong demand combined with increasing capital expenditures heading into next year. As management put it, "customers continue to demand faster than we can keep up with".
Financial Highlights. [See company report]
Raising Estimates. Despite recent market volatility, the company is realizing greater bookings, revenue, and earnings than any time in its past whie the market place is pleading for increased capacity and is concurrently transitioning to two new technologies in copper and 300mm. DRAM will likely experience short supply and therefore must ramp capacity. Within the next two years some 38 new fabs will be erected and Applied Materials, as the industry leader, will play a significant role in outfitting this growth. While we are leaving our revenue forecasts intact, we are adjusting our bottom line estimates to reflect the aforementioned gross margin expansion and operating expense reduction. As such, we are lifting our EPS estimate accordingly to $0.75, from $0.73 for FQ400. Likewise for F)1 we are raising EPS to $3.65 from $3.48.
Recommendation. Overall the Applied earnings release conference call provided some solid evidence that the current semiconductor cycle has not come to an end. Management stated their strong belief in capital expenditure increases next year at several leading semiconductor companies, including Intel, AMD, Motorola, Micron, in the United States. Infineon, in Europe, leading foundries in Taiwan and across Japan. In other words, the 12 to 18 outlook remains rosy. |
